Thanksgiving is almost here, and before you know it, it’ll be time to start planning parties for New Year’s Eve. But on top of holiday shopping, planning family trips, and everything else that comes with the holiday season, it’s important to get a handle on your tax planning before December ends.
In particular, there are a few things that absolutely have to get done by Dec. 31. If you don’t, you could miss out on valuable tax breaks or even face even more unexpected surprises. Below, you’ll find three tax-related moves to get done over the next several weeks.
1. Take any required minimum distribution from retirement accounts
Those who are 72 or older typically have to start taking money out of traditional IRAs, as well as from 401(k) or similar employer-sponsored retirement accounts. In addition, those who inherit IRAs and qualify to take annual withdrawals that stretch across their projected life expectancies also have minimum amounts that they have to withdraw every year. These mandatory withdrawals are known as required minimum distributions . Calculating the amount involves looking at the balance of your retirement accounts at the beginning of the year and applying a life expectancy factor to determine the fraction of the balance you have to withdraw.
For most people, these RMDs have to get taken out of their retirement accounts by Dec. 31. There’s a one-time exemption for those turning 72 during the year, as they can choose to put off taking their first RMD until April 1 of the following year. Miss your RMD, and the IRS can impose a massive 50% penalty of the RMD amount, so you won’t want to forget.
2. Harvest your tax losses
2022 has been a tough year for stock market investors, and many people have positions on which they’ve lost money. In order to claim a tax loss on those investments, you have to sell your shares by the end of the calendar year. That will generate a capital loss you can use as a tax benefit.
You can use capital losses to offset an unlimited amount of capital gains in the same year. In addition, if you have capital losses left over, you can use up to $3,000 per year against other types of income, including interest and dividends, wages and salaries, and taxable retirement plan withdrawals. If you have even more losses left over, you can carry forward any amount over $3,000 for use in future tax years.
3. Boost contributions to 401(k)s or other employer-sponsored plans
Lastly, one great way to reduce your taxable income is to take advantage of tax-favored retirement accounts. With IRAs, you have until mid-April of the following year to make contributions. But with 401(k)s and other employer-sponsored plans, there’s no grace period into the beginning of 2023. If you want to boost contributions, you’ll have to get the extra money in by Dec. 31.
Working with your HR department will give you the best chance to boost your contribution smoothly. Moreover, if you want to make a temporary increase but revert back to past practice when 2023 begins, you’ll definitely want to coordinate with your payroll folks to avoid any slip-ups.
It’s generally a good idea not to wait until the last minute to make these tax moves. That way, if there’s any delay because of the holidays, you won’t find yourself scrambling and possibly missing out. Taxes might not be the first thing on your mind as 2022 comes to a close, but spending a little time on tax planning now will pay off in the new year.